Qualified ROTH Distribution – Education
How will a qualified distribution for higher education be treated from a ROTH IRA? I understand the same distribution from a TIRA is subject to income tax up to the total amount of education expenses for that year.
Thanks,
Kirk
Permalink Submitted by Alan Spross on Fri, 2010-01-08 19:38
A Roth distribution for qualified higher education expenses (QHEE) is treated as follows:
1) If the Roth IRA itself is qualified, all distributions are tax and penalty free, no matter what they are for
2) If the Roth IRA is NOT yet qualified, then the ordering rules apply to the distribution. FIrst out is regular contributions, tax and penalty free.
Next out are conversions, starting with the oldest. If the conversion being distributed for QHEE has not been held 5 years, the QHEE exception will waive the 10% penalty up to the amount of QHEE, and these amounts are not taxable. And if earnings are being tapped as the last dollars out, these amounts are taxable, but the QHEE will waive the early withdrawal penalty on the earnings.
Permalink Submitted by Toby Hartley on Tue, 2013-05-07 21:33
By qualified ROTH you mean the client is 59 1/2 and had 5 years in? I have one where they’ve had 5 years but are under 59. If I understand it correctly they get into the earnings they will be taxed as ordinary income with no excess penalty?
Permalink Submitted by Alan - IRA critic on Tue, 2013-05-07 22:41
Yes, the Roth is qualified after 5 years AND age 59.5. Your client’s Roth is not yet qualified, and if the distribution gets into conversions under 5 years, the qualified education expenses will waive the 10% penalty. Further, if the distribution gets into earnings, it will be taxable but the education expenses will waive the penalty. Form 5329 is filed to claim the penalty waiver.